Convincing Features
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In an interview Alan Salter, the CEO of an ailing company issued a statement that, “It is not a cash cost; it’s a lower quality, inferior service to customers, lower levels of motivation and less work being done, causing this mess”.
Should these non-cash costs be included in the financial statements? Why?
In recent years there have been attempts to place a value on the “human assets” of a business in order to drive a figure that can be included on the statement of financial position. Do you think humans should be treated as assets?
Would “human assets” meet the conventional definitions of an asset for inclusion on the statement of financial position? Why do you say that?
The proprietor of a very small, part-time business was not interested in keeping detailed accounts for the business. Recently, an accountant advised that the business should have its account recorded under the double-entry system. The proprietor argued that the system was too costly and too detailed for the needs of the business.
What arguments should the accountant use to support the double entry system? Do you agree with the proprietor? Why
One often hears the statement: “Debits are bad and credits are good for the business.”
Do you agree? Why?
“It is possible for an entity to build up hidden amount of profit (known as secret reserves) by making some adjustments in the profit and loss account (Income Statement).”
What do you think? Discuss.
“The statement of financial performance and and financial position contains only past information, and therefore are not very relevant for decision making.”
What do you think? Discuss.
Why are adjusting entries necessary? Surely it causes too much delay in preparing financial statements, and the financial effect of any entries made is immaterial in the long run.”
Discuss this statement.
After calculating the current ratio for an entity and finding that the ratio’s value was 1.5, a student analyst decided that the company was in a sound position for paying its current liabilities.
Discuss the shortcomings of making such a conclusion.
In analyzing the financial statements of an entity, the following ratios were calculated:
| 2015 | 2016 | |
| Current ratio | 2:1 | 1:3:1 |
| Quick ratio | 1:1 | 0:7:1 |
| Receivable turnover | 30 days | 45 days |
| Inventory turnover | 3 times | 4 times |
| Profit margin | 10% | 7% |
Discuss any potential weaknesses that these ratios may reveal in the overall performance of the entity, and comment on possible causes for these results.
En. Kamal, is an accountant for ABC. Sdn Bhd. He was reviewing production cost report for the year. One amount in this report continued to bother him – advertising. During the year the company had carried out an expensive advertising campaign to sell some of its slower moving products. It was still too early to tell whether the advertising campaign was successful. There had been internal debate regarding how to report advertising cost. The director of finance argued that the advertising cost should be reported as cost of production, just like the direct material and direct labour. He therefore recommended that this cost be identified as manufacturing overhead and reported as part of inventory costs unit sold. Others disagreed.
En Kamal believed that this cost should be reported as an expense of the current period based on the prudential principle. Others argued that it should be reported as prepaid advertising and reported as a current asset.
The CEO finally had to decide the issue. He argued that these costs should be reported as inventory. His arguments were practical ones. He noted that the entity was experiencing financial difficulty and expensing this amount in the current period might jeopardize a plan debenture offering. Also, by reporting the advertising costs as inventory rather than as prepaid advertising, less attention would be directed to it by the financial community.
What would you do if you were En Kamal?
A manager of a small business made the following comment when a friend suggested that his business could benefit if he were to prepare cash budget.
“Some people think they are alright but I run only a small business and I don’t want to waste my time preparing budget which, after all, are just best-guessing the future. I am more interested in what actually happens, not what I think might happen.”
Do you agree with him? Why?
Even the richest men in the world face the problem of scarcity; hence choices have to be made, leading to a trade-off.
Provide an example for each of the situations below:
Oil prices around the world have dropped by more than 70% in the year 2016 compared to 2014.
Using a simple demand and supply diagram, illustrate the reason for this drop in oil prices.
Explain who benefits from the reduction in oil price.
In your opinion, what do you think could be done to stabilize oil prices?
Differentiate between short run and long run costs.
Provide an example of a business that is running in the:
Explain how the example differs in the short run and long run.
Out of the four market structures in the economy, which one do you think would be the best to run a business in?
Provide your answer with at least TWO (2) reasons for choosing the industry / market structure.
